Biden's EU trade dilemma brings more pain for Harley

The Biden administration faces a major dilemma in its dispute with the European Union over Trump-era steel and aluminum tariffs: back down to avoid acute pain for Harley-Davidson Inc and whiskey distillers or stick with the duties even though they are now exacerbating acute shortages for U.S. manufacturers.

The EU has threatened to double the tariffs on HarleyDavidson (HOG.N) motorcycles, American-made whiskey and power boats to 50% on June 1, cutting off any residual hope of exports to the continent. President Joe Biden has pledged that he will maintain the tariff protections for the steel and aluminum industries until the problem of global excess production capacity - largely centered in China - can be addressed.

His sentiments were echoed by U.S. Trade Representative Katherine Tai on Wednesday, and his Commerce secretary, Gina Raimondo, said earlier this month that the tariffs "helped save American jobs in steel and aluminum industries."

Harley-Davidson has also been hit by a European court ruling that its bikes produced in Thailand will be treated as U.S. made, subjecting them to the 50% tariff as well - on top of the normal 6% tariff.

"If not for which are now the tariffs, threatening our recovering export potential, we could be investing in jobs at our American facilities," Harley Chief Executive Jochen Zeitz told an earnings call. "Instead, we are facing huge tariffs in a trade war - in a trade war not of our making." The Milwaukee-based company is betting heavily on Europe, its second-largest market, to help fuel its turnaround strategy. But higher tariffs would give its rivals including Triumph, Honda (7267.T) and Suzuki (7269.T) a massive pricing advantage.

In Bristol, Pennsylvania, the craft distiller of Dad's Hat Pennsylvania Rye Whiskey recently managed to ship its first pallet to a European distributor in over two years after the current 25% tariffs stunted a growing export business in 2018. "If you double those tariffs, forget about it. It would be done," Mountain Laurel Spirits LLC owner Herman Mihalich said of his export prospects. The United Steelworkers union and the mills that employ its members are urging the administration to continue backing the Section 232 tariffs on steel and aluminum, arguing that lifting them would allow subsidized Chinese steel to flood back into the U.S. market via third countries.

USW President Tom Conway acknowledged the pain for Harley but said the protections needed to remain in place until Chinese excess capacity was reduced. "Some people get hurt when this sort of stuff goes on. So, I understand what they're saying. But I don't think the 232 can be lifted," Conway told Reuters, adding that perhaps the issue could be settled with steel import quotas for Europe.

US Trade Representative Tai told senators that she is working with EU counterparts to find a solution, but they must address the issue of excess capacity in China, which produces half the world's steel. She said she hopes that EU officials see the problem "as serious a challenge to their ability to produce and compete in steelmaking as we see it, and working together we will be able to resolve these sets of tariffs so that we can join forces on the bigger picture."

The EU has never accepted the premise of the 25% steel and 10% aluminum tariffs imposed by former president Donald Trump in March 2018, duties based on a Cold War-era trade law to protect domestic industries deemed critical to national security.

Critics from the EU to metals-consuming industries and the U.S. Chamber of Commerce argued that the metals were commodities available in ample quantity to meet U.S. defense needs and that European producers in countries that are trusted U.S. allies present no threat to U.S. security.

Sabine Weyand, director general of the European Commission's trade section, said earlier this month that she feared the two sides were "running out of time." When the tariffs were imposed, the steel industry looked very different from its current supply-constrained condition. Imports were flooding in, taking nearly 30% of the U.S. market, and holding U.S. Midwest hot-rolled steel spot prices below $600 per ton.

The goal of the tariffs was to return U.S. steel mills to 80% of capacity use, a level at which they could thrive, and imports sank to around 15% of the U.S. market in January. But this week, amid severe shortages caused by the coronavirus pandemic, that spot price is pushing $1,500 a ton, making it cheaper in some cases to import steel and pay the 25% tariff, some steel users say.